Economic activity is expected to improve in 2016 and 2017, boosted by an increase in public investment and steady growth in consumption, showed an economic report released by the National Bank of Kuwait (NBK).

This is happening despite the large decline in oil prices seen since the middle of 2014, and which has put some pressure on the government's fiscal position. While the government has already taken some measures to rationalize current spending, some of which are incorporated in the current budget, the impact on the domestic economy is expected to be limited, it said.

The pressure on the country's fiscal and external positions remains contained and manageable. The fiscal deficit should not exceed 6.2% of GDP in FY15/16 and is seen narrowing to under 4% in the following two years, it added.

Thanks to large fiscal and external buffers, the government is expected to maintain a relatively supportive fiscal stance despite the decline in oil revenues. The sovereign wealth fund is estimated at over 400% of GDP ($550 billion), the report indicated.

Activity in the nonoil sector has remained resilient, with growth accelerating to 4% in 2015 in our view. While growth is expected to accelerate, there are signs that nonoil activity is cooler than it would have been, had oil prices remained above USD 100, it said.

The real estate market cooled significantly in 2015 following a strong showing in 2014. Total sales during the first ten months of 2015 decreased by 29% compared to the previous year. Growth in 2014 had topped 21%, the report added.

Inflation picked up in 2015 on higher inflation in housing rent and food prices. Average (12-month) inflation reached 3.2% y/y in October 2015, up from 2.8% a year before. Most of the inflationary pressures have come from domestic sources, the NBK's report showed.

Offsetting these pressures have been a stronger dinar and weak international inflation. We expect inflation to average around 3.4% by the end of 2015 and to cool off in 2016 and 2017 to around 3%, it noted.